04/01/2015

Credit Availability: Where Are the Loans?

By Joel Singer, CEO, California Association of Realtors

The topic of credit availability has been fraught with confusion and misinformation. The U.S. has a huge credit availability problem. If underwriting today was the same as it was in 2002 — the “normal” benchmark of recent times — there would be as many as 1.5 million more mortgages than currently exists. Originations have been low, in part because “all cash” transactions have been so significant, but also because it’s very hard for many borrowers to get a loan. In other words, the affordability hurdle facing first-time buyers — and more often than not, people of color — is a problem in many cases of credit availability.

To be clear, credit is still tight. Very tight. There is a variety of measures that gauge the ease or tightness of credit availability for mortgages. According to the Mortgage Bankers Association’s (MBA) Mortgage Credit Availability Index, during the lending binge of 2004-2007, the index shot up close to 900. It has since not only corrected but has also swung so far in the other direction with the index now hovering at about 100. Why is it that lending is loose at the top of the market but tight at the bottom? Shouldn’t it be the reverse?

When looking at FICO scores and loan originations, originations are skewed toward high FICO score borrowers, while originations to borrowers with FICO scores under 660 have declined since the lending binge. Last year, more than 45 percent of the loans originated were to borrowers who had FICO scores above 750. However, the problem is that about half of the population has a FICO score less than 700.

The net result is that as many as 1.5 million loans are “missing” — loans that would have been made if credit underwriting standards were the same as in 2002, the last “normal” year, according to CoreLogic and Urban Institute. Perhaps it’s time to go back to the future!

Joel Singer is chief executive officer of the CALIFORNIA ASSOCIATION OF REALTORS®. Mr. Singer is a featured speaker at Orange County Regional Outlook Conference presented by the UCLA Anderson Forecast. To learn more about and register for the event, please click here.